The Bank of England and some commentators seem to think the higher rate of inflation we now have was a necessary side effect of action to boost the growth rate. They do not apologise for almost two years of inflation above the 2% target, or for the very high level of 5.2%/5.6% (CPI/RPI) it has now reached. They imply that if they had not taken monetary action to boost price rises, we would be experiencing even worse results on growth.
In the 1970s this country learned a very expensive lesson. It could not keep on borrowing and inflating its way out of debt. Then inflation was considerably higher than today. There were high levels of public borrowing. High inflation and excessive borrowing depressed activity and led to a trip to the IMF and interest rates above 15% for longer term loans by the government. Government resolved to mend its ways. In the 1980s better controlled public spending and borrowing, and lower inflation, enabled faster growth.
In the last two years inflation has lost us some growth. Price increases have outpaced wage increases. Consumers have been able to buy less as a result. This has knocked demand. The high price rises in energy have adversely affected the UK’s attractions as a manufacturing centre.
The government’s search for a stronger growth policy has to include as a central requirement, bringing inflation down and keeping it down. Inflation is not yet in the dangerous territory it reached in the 1970s. Most commentators think it will come down in 2012. It is most important the Bank helps it down and then keeps it down. Taking the fear of price rises out of the system would do more good than printing more money. Reassuring people that there will be no further squeeze on their real incomes from prices rising faster than earnings would be an essential first step.
The Bank needs to set realistic interest rates which are fair to savers as well as to borrowers and which bring base rate back into play for the private sector. Today base rate only seems to apply to the government. The Bank will find if it delivers its first duty to keep inflation to around 2% that will make a better contribution to growth than monetary experimentation linked to faster price rises.
The government has this week acknowledged that energy price rises are a problem. Shopping around, and creating a more competitive market are part of the answer. So is pursuing an energy policy geared to providing more good value power from the best available sources. Mr Osborne has said the government no longer wishes to outdo the EU with dearer power and more rapid moves to carbon dioxide targets. The government needs to recognise that we are trying to compete with India and China as well, and energy is an important cost. They also need to see that we need more demand, and that requires lifting the inflationary burden from family budgets.